So to be able to have a productive and successful business, business owners may want to look into maximizing their profits by way of the profit maximization concept. Profit maximization is when a company comes to a conclusion on the price and output level that will turn the maximum profit by using this particular process (Wikipedia). Granted there are many different approaches to this problem; however in this essay we will be considering the TR to TC method and the MR MC method. Tiffany C Wright expressed that the total revenue to total cost method is dependent on the fact that profit equals revenue minus cost. Total revenue equals price time’s quantity.
Define the price elasticity of demand and show how it is calculated. Answer: The units-free measure of the responsiveness of the quantity demanded of a good to a change in it s price when all other influences on buying plans remain the same. 3. What is the total revenue test? Explain how it works.
It also shows some other possible objectives for the firm. Sales revenue maximisation, for example, occurs when marginal revenue is equal to zero, as the next unit produced would carry a negative marginal revenue and hence reduce total revenue. The point where the volume of sales of the good are maximised subject to making at least normal profit is also shown (at the point where AR=AC). An Diagram Possible objectives of the firm I Profit maximisation may become
What theory of profit best reflects the performance of the plasma screen makers? 2 To reduce Agency Problems, executive compensation should be designed to: Correct Answer: create incentives so that managers act like owners of the firm. 3 Economic profit is defined as the difference between revenue
a bolt needed has increase in price for smaller qty needed to complete total production run. 1. Explain its relationship with total cost. The relationship between marginal cost and total cost is that both are the total cost in producing a unit of goods. C. Define profit.
By following the matching principle all of the costs associated with a particular product, not just its wholesale price, is expensed when the item is sold. Requirement 2 - A Generally, the lower of cost or market method is used to value inventory in order to “avoid reporting inventory at an amount greater than the benefits it can provide” (Spiceland, Sepe, & Nelson, 2013, p. 476). According to Spiceland, Sepe, and Nelson (2013) the “change in replacement cost usually is a good indicator of the direction of change in selling price” (p. 477). When the change in replacement cost is negative the LCM method allows companies to apply the conservatism principle. The conservatism principle involves “recognizing expenses and liabilities as soon as possible when there is uncertainty about the outcome, but to only recognize revenues and assets when they are assured of being received” (The conservatism principle).
QUESTIONS 1. Table 1 contains the complete cash flow analysis based on GP Manufacturing’s basic information. Explain the inputs into 1) the net initial investment outlay at year 0, 2) the depreciation tax savings in each year of the project’s economic life, and 3) the project’s incremental cash flows? 2. What is the project’s NPV?
“Assess whether price discrimination is always undesirable” (25 marks) Price discrimination is the act of charging different consumers different prices for the same product, for reasons no associated with cost. First degree discrimination occurs when consumers pay the maximum price that they were willing and able to pay, second degree involves charging a different price for different quantities demanded and third degree occurs when charging different prices to different consumer groups. This statement suggests that price discrimination is always undesirable, however, although there are disadvantages to price discrimination, there are also some advantages that can be derived and therefore although price discrimination is undesirable to an extent, it is not always undesirable. A predominant reason why price discrimination is undesirable is because it can significantly reduce, or in extreme circumstances eliminate, consumer surplus, which in turn signifies a loss of welfare. This occurs with first degree price discrimination as consumers must pay the maximum that they were willing/able to pay, which may lower their real income.
NPV takes into account discounted cash flows; making it the most correct of any of the capital budgeting methods as it considers both risk and time variables. This analysis evaluates the forecasted cash flows by discounting them back over the life of the project using that duration as well as the weighted average cost of capital (WACC).1 The IRR is the interest rate that makes the net present value of all cash flow equal to zero. In financial analysis terms, the IRR can be defined a discount rate at which the present value of a series of investments is equal to the present value of the returns on those investments.1 The IRR rule states that if the internal rate of return (IRR) on a project or investment is greater than the minimum required rate of return – the cost of capital – then the decision would generally be to go ahead with
Question 1 Currently, 9.30% is used as their hurdle rate and satisfied with the intellectual relevance of a hurdle rate as an expression of the opportunity cost of money by the managers. As a result the firm’s share prices are sluggish. Their price-to-earnings ratio is also below investor’s expectation in comparison to the company’s risk. The relationship between risk and return is important to take into consideration. The constant hurdle rate results in a flat line and doesn’t correlate risk with return.